New trust reporting requirements became effective on December 15, 2022 for all trusts with a taxation year ending after December 30, 2023. The enhanced reporting rules now require most trust arrangements to file tax returns or be subject to penalties. This includes bare trusts commonly used in real estate activities and many “in trust for” bank accounts held for the benefit of minor relatives. Trusts with a December 31, 2023 and later taxation year could be affected.
Previously, trusts were generally required to file a trust tax return (T3) only if they had taxes payable, had disposed of certain property, or had made distributions to their beneficiaries. New reporting requirements expand not only which trusts should file a trust return, but also the information to be reported in the trust return. The new requirements also include additional late filing penalties if a trust fails to comply with the new reporting and disclosure requirements, regardless of whether there is a tax amount payable.
These rules also apply to other “express trusts” which are generally created intentionally, such as family trusts, personal trusts (spousal and alter-ego trusts) and most trusts created from a Will, in addition to bare trusts and bank accounts held “in trust for” family members as previously noted. The expansion of the rules results in trusts now being required to file returns which previously had been exempt.
The new enhanced trust reporting requirements require most trusts to file a trust return even if they do not have any income or distributions to beneficiaries. The following trusts remain exempt from filing a trust return if they do not have any income or distributions:
- · Graduated Rate Estates (generally, an estate within the first 36 months after death);
- · Certain regulated trusts such as a lawyer’s general trust account;
- · Certain employee trusts such as employee life and health trusts and employee profit sharing plans;
- · Qualified disability trusts;
- · Trusts that are charities or non-profit organizations;
- · Trusts under or governed by certain registered plans;
- · Mutual fund trusts, segregated funds and master trusts; and
- · Cemetery care trusts and trusts governed by eligible funeral arrangements. Trusts are also exempt from filing if they have been in existence for less than three months or only hold assets with a fair market value of less than $50,000 which are made up of cash, listed securities and certain debt obligations. Trusts that own real estate or shares of private corporations are not eligible for this exemption.
The new reporting requirements require trusts to report the name, address, date of birth, jurisdiction of residence and the taxpayer’s identification number (i.e. SIN, business number, etc.) for each potential beneficiary, trustee, settlor and any other person that exerts influence (i.e. a protector) through the terms of the trust or a related agreement. A person that “exerts influence” has the ability to control or override trustee decisions over the appointment of income or capital of the trust.
Trusts which are non-compliant with the new reporting and disclosure rules could be subject to significant penalties. The previously existing penalties included a late filing penalty of 5% of the unpaid tax plus 1% of the unpaid tax for each full month that the trust return is late (with additional penalties for repeat late filers). The new legislation introduces a failure to file penalty of $25 per day, with a minimum penalty of $100 and a maximum penalty of $2,500, plus a penalty for each ‘slip’ that should have been issued to a beneficiary.
An additional penalty now also applies if the trust knowingly, or due to gross negligence, fails to file a return or makes a false statement or omission. This penalty would be the greater of $2,500 and 5% of the highest fair market value of all the property held by the trust in the year.
As the entering of the new disclosure reporting requirements is a more time consuming process, we are strongly suggesting you begin the information gathering process now to avoid any potential late filing penalties.
We have enclosed a chart to help you gather the necessary information needed to satisfy the disclosure requirements above. Please complete this chart and return it to our office as soon as possible.
If you are unsure whether these new rules affect you, please do not hesitate to contact us.